Bank of England to assess threat to economy from rising house prices

The Bank of England plans to conduct a “deep analysis” of the threats to the
economy from housing to prevent a bubble inflating that could damage the
nation’s prospects.

If it detects a bubble, the Bank has the power to make mortgages more expensive for banks to offer and to recommend they tighten affordability tests – by lowering loan-to-value or loan-top-income ratios, for example.Photo: Alamy

Minutes to this month’s Financial Policy Committee meeting also showed that it will review “the range of tools” it has to control an overheating market.

The pledges were made in the FPC’s meeting two weeks ago amid mounting concerns that the Government Help-to-Buy subsidised mortgage scheme would stoke a housing bubble. Since then, the FPC has been handed powers to recommend alterations to Help-to-Buy, which will start next week, every September.

Speaking on BBC Radio 4, David Cameron suggested the Bank could intervene earlier and more frequently. “We have given the Bank all the powers necessary to examine this scheme... They can make comments on debt levels in the economy, potential bubbles in our economy, whenever they want,” he said.

Echoing words used by Governor Mark Carney, the FPC said “it would need to be vigilant to potential emerging vulnerabilities in the financial system”.

“That meant, first, close monitoring of developments in the housing market and banks’ underwriting standards. Second, it was important that the Committee should develop a deep analysis of the ways in which housing developments might affect financial stability.”

It recognised that there were “a number of potential feedback loops between economic developments, housing and financial stability” and that housing had played an “important role” in several past UK credit cycles.

If it detects a bubble, the Bank has the power to make mortgages more expensive for banks to offer and to recommend they tighten affordability tests – by lowering loan-to-value or loan-top-income ratios, for example. However, the FPC added that it “should review the range of tools that could be used to mitigate risks to financial stability” from housing.

Should it need to use the tools, it pledged to used them “ in a way that was proportionate to the risks and consistent with a graduated response”.

The minutes also appeared to reveal that the Treasury had not asked the Bank to take on its new powers on Help-to-Buy a fortnight ago.

Under Help-to-Buy, the Government will offer banks an indemnity against losses on the first 20pc of the mortgage so long as the buyer puts up at least 5pc of the asking price. The idea is to help more first time buyers onto the property ladder.

The scheme is open for homes worth up to £600,000 for three years. The Treasury expects that about £12bn of taxpayer insurance will be provided, for a fee, on as much as £130bn of lending.